Archive for March, 2010

Introduction

Online game software licensing authentication has come into vogue. Gaming software companies have promised users the ability to purchase and download games at any time without having to go to a retail outlet and by giving them the added benefit of a license key permanently tied to their account. They have also given users the ability to re-download any game at any time so that the users never have to worry about losing a disc and have the added convenience of being able to reinstall almost automatically on a restored, rebuilt or new computer.

In return, the leaders in the online licensing and distribution space, Steam and Impulse, have garnered loyal customers. More importantly, in return for convenience, they lock users into licenses that are not transferable â€“ not alienable.

Certainly, those licenses may indicate they are not transferable by sale or gift or otherwise anyway, but what parochial gamer reads such licenses or cares? And why should the gamer care? If he owns physical property (a disc) and possesses a code that allows him to play the game, why should he not be able to sell the disc and the code to another person for a lower-than-retail price once he is finished with the game?

Game companies donâ€™t like this. Instead of making $50 on one sale, even though two or three players may have enjoyed serially gaming on the same license, the companies would prefer to sell the first copy to the early adopter for $50 and then a new copy to the second player, perhaps at a reduced price of $40 and a third copy to a third player for $35, and so on and so forth.

So, as is often the case, the interests of the game-players (in aggregate) and the game distributors are in conflict. When they have been heavy-handed, game companies have usually lost the battle: onerous copy protection is often cracked and no one, candidly, blinks an eye at selling a used game to another person. The original purchaser believes (errantly) that he owns a copy of the game and that a sale to a new person is just between him and the new buyer.

To my mind, it is unfortunate that game distributors and publishers do not simply acquiesce and adopt an ownership rather than a license model. But, it appears the companies have realized that wielding sticks with computer gamers is not so effective as employing carrots or honey.

The honey is what Steam (and Impulse) provides: ease of purchase, immediate notification of upgrades, an automatic authentication system (no need to input silly numbers anymore), saved records that are never deleted, and the assurance that gaming preferences will be stored, for some games, for your account no matter where you access the game.

Of course, the honey is meant to gently ensnare gamers. Once a player purchases a game on Steam and similar services, he cannot resell it or give it away. There is simply no mechanism for transferring the license to another person.

Why Steam’s Model is Misguided

There is nothing inherently morally wrong with the model that Steam uses to attempt to increase sales. I do think it is misguided and not as profitable as people believe.

Currently, if Player One buys a game for $50, defeats it and is now finished with the game such that he will not reasonably replay it, what does he do? Nothing. The license is stored for him forever. Valve Corporation, which owns the Steam platform, and the game publishers that use its platform believe that forcing customers to buy new games directly from them will increase overall aggregate revenues in the long term. Sadly, this belief is similar to the beliefs that perpetuate the Broken Window Fallacy.

On the other hand, lower prices decrease barriers to entry, and augment network effects for continued adoption of the game.

If Player One could sell the game to another, Player Two, for a lower price, letâ€™s say $30, certainly Steam would like to garner that money for itself, and so hopes that by restraining alienation (preventing resale), that Player Two will buy the game directly from Steam so as to ensure that the money that Steam receives in total is $80. For this to be true, assuming Player Twoâ€™s preferred price is $30, Steam would have to lower the price at about the time that Player Two is willing to buy the game. If Steam doesnâ€™t do so, the opportunity to make the sale is lost, and in the meantime there is no way for Player One to recoup any money.

Why should Steam want Player One to recoup money? Because Player One has already demonstrated himself to be a willing customer of Steam. If he is willing to spend $50 to purchase from Steam, he likely is willing to take the $30 he might gain from a sale to Player Two to put toward a new purchase. Steam could easily see the $80 anyway. In fact, since Player One has demonstrated himself to be an early adopter, he might put the $30 he receives from Player Two toward a new game of a higher price, effectively turning a $30 sale to Player Two into a new $50 purchase with Steam. In the end, Steam does not get the $30 sale to Player Two, but it does receive $100 from Player One.

Certainly, there is no guarantee Steam will realize a sale in either scenario, but over the aggregate, it seems more likely that players who are already predisposed to buying new games would take money they received from sales to third-party players and purchase from Steam again.

Furthermore, if a player could alienate his games to people on the Steam platform, the player would, in many instances, invite buyers to create new accounts with Steam so the license could be transferred, increasing Steamâ€™s potential customer base. Steam can now directly advertise to the buyer/new player as a captured customer.

How to Punk Steam1

(How to Break the Misguided Business Model for Online Game Distribution)

Absent the creation of a platform that allows alienation between users of gaming software licenses (or Valve/Steam and others changing their tunes), I propose the following idea. I leave it open to any innovative, courageous group of software engineers to implement, given that there are numerous intellectual property and contractual licensing obstacles to overcome (read: Valve will likely sue you).

For the sake of the argument, letâ€™s call the new company Punk.2 Punk would sign users up for the express purpose of enabling them to pseudo-alienate their licenses between one another.

Punk would operate as a meta-authentication system. That is, Punk would sign users up with accounts and would also require the users to connect their Steam accounts to their Punk accounts. Punk would then magically access and index a userâ€™s Steam licenses. The Punk system would do so for each of its legion users.

The user would specify to Punk that it would like to alienate, or rather, pseudo-alienate a gaming license to another Punk user. In order to do so, Punk would serve as an intermediary protocol between the new user (â€œbuyerâ€) and Steam. This would likely require two layers, an online account layer for Punk as well as a regularly updated client downloaded by its own users so that the client can interface with the Steam client.

The Buyerâ€™s Punk client would send requests to Steam, disguising itself as the original user (â€œsellerâ€) using the Sellerâ€™s stored, encrypted authentication information so that Steam believes the license is properly authenticated to the computer sending the request. Once the authentication for the license is approved (since Steam requires online authentication each time a player plays his game), Punk would have done its job, because now the Buyer is able to use the Sellerâ€™s game. In a sense, Punk would serve to de facto shard the licenses of a Steam user’s account, allowing a Buyer to use whichever of the Seller’s licenses the Seller allows. Of course, the system would be designed to allow multiple Buyers to authenticate to Steam via Punk. Punk, in the background, is keeping the authentication of all interested parties separate, discrete and encrypted.

So, when the Seller looks at his Steam account, he sees nothing has changed. A Steam account will still show all licenses, unperturbed. But the Punk account will indicate the games he has pseudo-sold to other Punk users. Punk would have to interface with the Steam client to ensure that the Seller does not continue to play his licensed game directly via Steam, else this would break the model. Punk could do so by integrating as a layer on top of Steam and function by monitoring Steam activity. If the Seller continues to use his license and prevents the use of the license by the Buyer, Punk could employ a warning / fining / banning system to enforce the transactions between its users. Caveat emptor.

The business model (disregarding tortious interference of contract claims), of course, is obvious. Punk provides the inter-user transaction mechanism (the checkout cart), and take a percentage of â€œsalesâ€ between Punk users.

Steam would likely try to thwart Punk, just as Apple combats the jailbreaking of iPhones, so there are some obstacles to consider:

Until Punk was able to overcome any current thwarting mechanism created by Steam, the Buyers would be precluded from playing the games they had â€œbought.â€ Disruption of service would be wholly annoying to any Buyers. Certainly prices would reflect this potential, but it also, alone, has the possibility of preventing this model from working at all.

Valve (Steam), Stardock (Impulse) and others would not hesitate to sue Punk under various legal claims.

Ensuring Sellersâ€™ compliance with the terms of the pseudo-sale, which could mandate the Sellersâ€™ non-use of the software they had alienated to other Punk users is the other likely failure mode for the model.1 With credit to MTVâ€™s Punkâ€™d2 Apologies to any companies out there who are actually operating under the trademark â€œPunkâ€ â€“ I mean no reference to these entities.

This is a scene I watched just a few minutes ago from Shenandoah with Jimmy Stewart:

Stewart plays Anderson, a Virginian farmer with six sons, whose land is surrounded on all sides by Union armies. He refuses to participate in the war, at least at he beginning of the movie. Johnson, a Confederate soldier comes to him to recruit Anderson’s sons.

Johnson: Thereâ€™s a Yankee army breathing down your neck, Mr. Anderson. I donâ€™t think you realize â€”Anderson: Youâ€™re town-bred arenâ€™t you?
Johnson: I donâ€™t see what that has to do with â€”Anderson: Iâ€™ve got five hundred acres of good, rich dirt here. As long as the rains come and the sun shines itâ€™ll grow anything I have a mind to plant. And we pulled every stump. Weâ€™ve cleared every field. Weâ€™ve done it ourselves without the sweat of one slave.
Johnson: So?Anderson: So?! So, can you give me one good reason why I should send my family that took me a lifetime to raise down that road like a bunch of damn fools to do somebody elseâ€™s fighting?
Johnson: Virginia needs all of her sons, Mr. Anderson.Anderson: That might be so, Johnson, but these are my sons! They donâ€™t belong to the state. When they were babies I never saw the state coming around with a spare tit. We never asked anything of the state and never expected anything. We do our own living â€” and thanks to no man for the right.

Disclosure: A friend of mine forwarded this to Stephan Kinsella, a libertarian lawyer in Houston, who also posted it on his blog, which I’m happy for, because his readership is much larger.